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Emergency
Committee
15 February
2023
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Memorandum
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8
February 2023
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To:
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All
councillors
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CC:
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Mayor Wayne Brown
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Subject:
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Updates to annual budget consultation items
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From:
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Peter
Gudsell, Group Chief Financial Officer
Ross
Tucker, General Manager Financial Strategy and Planning
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Purpose
1. To
provide an update on the development of the Annual Budget 2023/204 consultation
items relating to opex reductions in regional grants, regional services, local
board funding and reduced funding for Tātaki
Auckland Unlimited (TAU).
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Summary
2. On
15 December 2022, the Governing Body agreed to consult via the draft Annual
Budget 2023/2024 on proposals to:
· Reduce regional contestable grants by $8 million
· Reduce general rate funding of regional services such as
community and education programmes, regional events, economic development and
other social activities by $20 million
· Reduce local board funding by $16 million, representing
5% of the total operational funding allocated to local boards
· Reduce funding to TAU by $27.5 million through a mix of
efficiency savings and reduced operating costs that would have some
implications for service delivery.
3. Staff
have investigated and developed these proposals further to support the Annual
Budget 2023/204 Consultation Document and decision-making process.
4. In
assessing these proposals further and allowing for possible overlaps in these
options, staff have identified that there are not $8 million of regional
contestable grants to put forward as savings. Rather, the amount available is
$3.4 million.
5. Staff
have looked at broadening the scope to ‘regional grants’ and
including non-contestable activity, which could increase the total potential
savings to $5.65 million. However, this would mean stopping funding to a
range of partner organisations that deliver regular events and programmes
that are highly valued by many Aucklanders.
6. Alternatively,
the council could consider reducing the $8 million savings for regional
grants to $3 million and keep the scope limited to regional contestable
grants as originally proposed. The impact of this would be a reduction in the
total proposed cost reductions for the annual budget from $130 million to
$125 million. It would be possible, although not ideal, to still
balance the $295 million estimated shortfall with the use of some additional
debt.
7. As
requested by the Governing Body, local boards have been provided with
high-level information to support a reduction in Asset Based Services (ABS)
operating costs. These include temporary and permanent closure of local
community facilities; reduced or no mowing in identified areas; service level
reductions at council operated venues and reductions in library opening
hours. Local boards will also be considering savings opportunities in Locally
Driven Initiatives (LDI) funding and proposed changes to community lease
fees.
8. TAU
staff have also advised the implications of the reduced funding for TAU is
going to be more severe than initially indicated as the 2023/2024 base budget
already had a $17 million savings target that will be difficult to achieve on
top of the $27.5 million reduction in funding. The additional service impacts
will mean that council funding of economic development activity will cease
and there will be a material reduction in visitor attraction activities.
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Context
9. On
15 December 2022, the Governing Body agreed the items for consultation in the
proposed Annual Budget 2023/204. This included a proposed mix of budget
options, to address the estimated $295 million operating budget gap for
2023/2024. The proposal comprised:
a. Reducing operating
spending by an additional $130 million across the council group, over and above
existing budgeted savings targets
b. Selling our 18.09 per
cent shareholding in Auckland International Airport to reduce our annual
borrowing costs.
c. Increasing the average
general rates by 7 per cent for 2023/2024, with rating policy adjustments that
would result in an overall 4.66 per cent rates increase for the average-value
residential property
d. A modest use of debt of
up to $75 million, well within policy limits.
10. The Governing
Body agreed that Auckland Council’s $60 million share of the cost
reductions would be achieved through:
a. A number of items to be
implemented under the delegation of the Chief Executive, in addition to the
work to achieve a $30 million existing savings target for 2023/2024 primarily
through focusing on support services including simplification of management
portfolios and structures.
b. Public consultation via
the Annual Budget 2023/2024 on:
i. $20 million reduction in
general rates funding of regional services such as community and education
programmes, regional event, economic development and other social activities.
ii. $8 million reduction in
regional contestable grants
iii. $16 million reduction to local
board funding, representing a 5 per cent reduction in the overall operational
budget for local activities
iv. $3 million of proposed changes to
fees and charges
v. Withdrawing from the direct
provision of early childcare education services with an estimated reduction in
general rates funding of $1 million
11. A $27.5
million operating savings target for TAU was also agreed, to be achieved
through a comprehensive post-merger efficiency programme including driving
revenue opportunities ($10 million) and consultation on other initiatives that
would deliver $17.5 million of savings requiring consultation due to the impact
on services.
12. Staff have
progressed these proposals with an increased level of detail, to support the
development of the Consultation Document and the decision-making process.
Discussion
Auckland Council
13. In
developing proposals, staff have collaborated to ensure consistency in approach
and elimination of duplication. This has identified crossover areas between
budgets affecting the size of the available envelope from which savings were
previously expected to be found.
14. For
example, there is a natural overlap between local board activity and regional
community services. Regional services exist in local communities and staff
often work across both areas to deliver joined-up services to Aucklanders.
15. Further to
this, some specific budget items within programmes identified for savings were
found to be committed and/or linked to a high strategic priority.
16. Staff
have considered options to address issues with the regional grants proposal,
and are recommending some minor changes to the make-up, scope and definition of
the various savings proposals.
Regional grants
17. The council
provides services across a wide range of activities. Some services are
delivered directly; some are contracted to service providers, and some are
delivered through community groups that are funded by council grants.
18. In
progressing the proposal to reduce regional contestable grants by $8 million,
staff have excluded:
a. Current multi-year
funding agreements that the council is a party to
This funding is contractually committed and removing them is high risk.
b. Funding allocated specifically
to support advancement of Māori Outcomes
Acknowledging council’s policy and strategic commitments in this area.
c. Grants that are issued
by local boards using both Locally Driven Initiatives (LDI) and Asset Based
Services (ABS) funding
These will be considered by local boards as part of their savings target.
d. Grants that are funded
specifically by a targeted rate or other external party
This proposal related specifically to general rates funded activities.
19. The full $8
million reduction originally proposed cannot be achieved without impacting
these items. Staff have identified a maximum of $5.65 million of Auckland
Council regional grants that could potentially be stopped.
20. Of this, $3.4
million are regional contestable grants in the areas of arts, culture, events,
community, sport and recreation, environment and heritage. Taking account of
the exclusions listed above, there are no further regional contestable grant
options to explore.
21. The maximum
savings of $5.65 million could be achieved by broadening the
scope to ‘regional grants’ and including non-contestable activity.
This would mean stopping funding to a range of partner organisations that
deliver regular events and programmes which are highly valued by many
Aucklanders.
22. Alternatively, the council could consider reducing the $8 million
savings for regional grants to $3 million and keep the scope limited to
regional contestable grants as originally proposed. The impact of this would be
a reduction in the total proposed cost reductions for the annual budget from
$130 million to $125 million. It would be possible, although not ideal, to
still balance the $295 million estimate shortfall with the use of some
additional debt. This can be achieved within the current budget proposal of
using up to $75 million of additional debt[1].
23. As the Governing Body will need to consider what to do with this
proposal, the content relating to this proposal has not yet been fully updated
in the draft consultation materials.
Regional services
24. Regional
services are service-based activities the council delivers to create a city
with great neighbourhoods, centres, parks and public spaces.
25. In December,
the Governing Body agreed to consult on a proposed $20 million reduction in
general rates funding of regional services “such as community and
education programmes, regional events, economic development and other social
activities”.
26. Further work
on identifying and developing this proposal has identified that the best way to
manage the community impacts would be to include a slightly broader range of
regional services rather than those with just a social or community component.
27. The proposed
reductions across regional services have been detailed in the draft
consultation materials, including where services would be stopped, reduced or
alternative funding sought. Specific examples identified include:
a. Arts and culture
programming (including council funding for Pacific Arts programming, Proud
Centres and UNESCO City of Music along with support for exhibitions in council
art facilities)
b. Education services (e.g.
impacting regional in-person research services at libraries,
environmental/sustainability education programmes and experience centres)
c. Regional Events
(including stopping council funding for events such as Music in Parks,
CultureFest)
d. Community and Social
Innovation programmes (including the Southern and Western initiatives, UpTempo)
e. Community programmes and
social services (e.g. stopping Citizens Advice Bureau funding)
f. Outdoor experiences
supporting young people.
g. Funding and staff for
council’s operational homelessness response
h. Regional coordination or
support of community focused initiatives
i. Climate action
related behavioural change activities funded by general rates
j. Ceasing funding for
COMET, a council-controlled organisation that supports education and skills
training.
Local board funding
28. The Governing
Body agreed to consult on a $16 million reduction to local board funding,
representing a 5 per cent reduction in overall operational budgets for local
activities.
29. This applies
to both Locally Driven Initiatives (LDI) and Asset based Services (ABS)
funding, and activities funded in this way are not being considered as part of
the regional grants or regional services proposals.
30. Staff have
provided advice to local boards on potential options to support a reduction in
ABS operating costs. These include:
a. Opportunity to reduce or cease
mowing in identified areas
b. Reduction in levels of service
at council operated venues
c. Temporary or permanent closure
of local community facilities
d. Reductions in library opening
hours.
31. Local
boards will also be considering their individual LDI budgets and proposed
changes to community lease fees.
Tātaki Auckland
Unlimited (TAU)
32. While
undertaking more detailed planning on the implementation of savings initiatives
TAU advise that the service implications of the proposed funding reductions
will be greater than what was initially advised as part of decision making in
December.
33. TAU
have an existing $17 million savings target, or reduction in Auckland Council
funding, built into their base 2023/2024 budget when compared with the current
year. Higher revenue was planned for, however, with a further $27.5 million
reduction expected, further cuts to some services will be required to deliver
the full savings.
34. TAU
has identified a range of proposed actions to achieve the total reduction (the
$17 million already in the budgets plus the $27.5 million) in council funding,
these include:
a. Reducing
Auckland Council’s role in marketing Auckland internationally to attract
investment, business and visitors
b. A material
reduction in the economic growth and visitor attraction activities, including
reduced spend in support for business events and major events attraction and
bidding, and the marketing of Auckland as a tourist destination
c. Removing rates funding of economic development activities,
so these activities will only be able to proceed if fully funded by central
government or external partners
d. A review of
pricing, opening hours, staffing costs and programming at regional facilities,
which may involve the introduction of user pays in areas previously not charged
for both Aucklanders and international visitors
e. Reducing
subsidised access provided to regional facilities and community events that are
currently free to the public
f. Developing
industry funding models to support ongoing destination activity.
35. TAU
is doing further work to determine the consequences of the funding decisions
and the level of support TAU may continue to provide concerning the economic
development activity. Once confirmed, the implementation plan will include
appropriate engagement with relevant community groups, local boards and
consultation with relevant staff.
Next steps
36. On 15
February 2023, Governing Body will meet to adopt the consultation document
prepared by council staff, which will incorporate the updates to the budget
discussed above.
37. Staff are
continuing to investigate and progress savings opportunities. Elected members
will be kept informed of any updates to current proposals and/or new
opportunities identified.
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Emergency
Committee
15 February
2023
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Memorandum
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8
February 2023
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To:
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All councillors
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CC:
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Mayor Wayne Brown
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Subject:
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Impact of the
storm event on the group’s financial position
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From:
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Peter Gudsell, Group Chief Financial
Officer
Ross Tucker, General Manager
Financial Strategy and Planning
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Purpose
1. To
advise elected members on the nature of the financial impacts of the recent
storm event on the Auckland Council Group and what this means for the Annual
Budget 2023/2024.
Context
2. There
is no ability to slow down the annual budget process and we must press on with
adopting materials for consultation at the Governing Body meeting on 15 February.
3. We
must move quickly to consider the impacts of the storm event that hit the
region beginning January 27 and any changes to the proposed budget.
4. Finance
staff have worked closely with the Mayor to ensure we are providing you with
the best information currently available, and to urgently progress any
necessary changes to the draft consultation material.
Analysis and advice
How the storm event will impact the
group’s financial position
5. As
with any sudden or unexpected large-scale event, there are potential financial
implications from the flooding that hit Tamaki Makaurau beginning on January
27.
6. It
will take some time to fully work out the detailed costs, but we know this will
include spending to support the flood response and recovery work as well as
costs to repair or renew some assets we own and manage. These costs could be
substantial over time.
7. While
we cannot yet assess the full scale of costs, we believe there is enough
flexibility within our borrowing limit to support the financial impacts.
Through a mixture of existing capital spending budgets, insurance recoveries,
our climate change response fund, other central government funding and the debt
headroom we already have, we consider we can deal with the near-term financial
effects of this devastating and tragic event.
8. The
medium to long term impacts on the city’s infrastructure will need to be
carefully considered through the next long-term plan process.
9. While
responding to the flooding is our immediate priority, the challenge of
balancing the forecast $295 million shortfall in the 2023/2024 budget (and
beyond) has not gone away. It means we need to continue to address the
council’s immediate budget challenge and make sure we focus on delivering
the services that matter to Aucklanders and providing those services in the
most efficient ways.
10. The items for
consultation via the budget agreed by the Governing Body on December 15
includes significant proposed reductions in council spending and measures to
simplify what we do. Some of that work is already underway, and to ensure
Auckland is in the best possible shape to recover from the floods we need to press
on with those efforts, including work on simplifying our management structures
and planning processes.
11. Our ability
to move forward with cost reductions and the other budget options should be
largely unaffected by the storm events. However, some of the proposed cost
savings may take longer to implement as our primary focus right now needs to be
on the storm response and recovery.
12. One specific
cost proposal was the way we budget for reactive stormwater maintenance. A move
to base it on long-term averages was expected to reduce our operating budget
requirement by $2 million a year. This might no longer be appropriate and will
need to be reviewed as part of decision-making on the final budget. This would
require $2 million of alternative funding to be found.
13. Local
communities have greatly assisted in managing the flood event. The budget
proposals contain cost reductions relating to supporting community
organisations (or improving outcomes for communities). Given the storm event
these proposals may attract significant feedback. There could also be
questions raised about the change to the Water Quality Targeted Rate given its
association with stormwater activities. The budget consultation process
provides an opportunity for the public or any other interested parties to raise
these kinds of concerns.
14. We are also
mindful that some ratepayers severely affected by flooding might struggle with
paying their rates. There are already arrangements in place to help people with
paying their rates, and grants that provide a wider range of financial support
to directly impacted people. Where flood damage or land erosion has had a
material impact on property values, this can be reflected in the rating
valuations for the 2023/2024 financial year.
15. In addition
to the direct impacts that the storm will have on the group’s financial
position, further budget changes will likely be needed to make the region more
resilient and responsive to future storm events.
Current year flood-related costs and how
we will manage them
16. While we
cannot yet calculate the costs associated with the floods, the following are
the types of costs that we will be assessing over the next few weeks and
months:
· Emergency management activities, building inspection costs, damage
assessment of council property and infrastructure, clean-up, and repair costs.
· Capital expenditure is likely to be required to renew damaged assets
that we manage and own.
· Providing for free disposal of storm-related waste and free boarding
and registration for pets at the council’s animal shelters.
· Any increase in the use of existing rates remission or postponement
schemes by impacted property owners.
· Revenue from storm damaged council-owned facilities such as the Zoo
and other community facilities will also be reduced.
· Disruptions to the public transport network and the waiving of
transport infringement notices over the flooding period will have a revenue
impact.
17. All things
being equal this unexpected and unbudgeted additional expenditure would be
funded through additional borrowing.
18. The following
factors are likely to at least partly offset the level of borrowing required:
· Current-year under-delivery of the capital programme
· Any external insurance recoveries
· Use of the climate change response fund – a $10 million
capital contingency fund spread over multiple years that was set-up in 2018 to
address emergency works required because of extreme storm events.
· Transport related emergency works carried out by Auckland Transport
will likely receive a 51% Funding Assistance Rate from Waka Kotahi.
19. In addition,
the council’s financial position might be affected by asset write downs
for flood damaged property and infrastructure assets, and by a reduction in the
equity value of the council’s self-insurance fund.
Managing costs for the
2023/2024 annual budget year
20. Additional
debt in the current year could increase interest costs for next year. Also,
insurance premiums are likely to increase.
21. As mentioned
above, most cost reductions should be able to still proceed, although some
might take longer to be implemented than previously thought as we focus our
efforts on storm response and recovery. This means that savings achieved in the
2023/2024 financial year could be lower than previously indicated. The large
savings targets also makes it very difficult for the group to absorb any
additional costs.
22. The latest
economic data suggests that the outlook for inflation and interest rates might
not be quite as bad as it was looking late last year. Nevertheless, the
forecasts are still high and remain very uncertain with some commentators
suggesting that the storm events will also contribute to inflation pressures.
23. At this
stage, we consider that the forecast $295 million gap and the proposed mix of
budget options to address it that the Governing Body agreed in December remains
a sound basis for public consultation on the annual budget. However, balancing
next year’s budget is harder and some budget levers may need to be pulled
harder if it is credible and prudent to do so.
24. To increase
our level of preparedness for future storm events, we may need to make
additional provision in our operating budgets for proactive and reactive storm
response activity. This could include more regular clearing of drains as well
as increased provision for things such as emergency management, waste disposal,
building inspections and support for affected people. We suggest budgeting an
amount of $20 million each year, equivalent to 1% of rates. Any such additional
operating expenditure in the budget would need to be supported by additional
funding. To be sustainable, this could mean a higher rates increase - as it
would not be appropriate to continually borrow to pay for cleaning the drains
on a regular basis.
25. The group
might also need to bring forward asset renewal spending in order to fully
address storm damaged assets. While planning for this renewal it will be
important to recognise that some of these assets may be prone to ongoing
flooding, uninsurable for flood damage, no longer fit for purpose or may have other
issues that means the council should consider whether renewing or replacing
that specific asset represents best value for money.
26. The planned
capital investment across the group for 2023/2024 is currently $2.8 billion and
given the current constraints on labour and materials, any additional
requirement to fix storm-damaged council asset will most likely need to be
addressed by delaying planned new projects and redirecting the money and
resources into urgent asset renewals.
27. Over the
medium-term we will need to look at how we forecast storm frequency and
intensity, and potentially rethink our approach to planning and building
climate resilient infrastructure. This will be complicated and therefore needs
to be addressed through the next long-term plan. In the meantime, it will be
more important than ever to balance the budget and keep debt as low as possible
to ensure we will be in good financial position to act on and react to these
issues.
What this
means for the proposed budget
28. The need to
address the forecast $295 million challenge and balance the council’s
budget remains critical.
29. The proposed
mix of budget levers remains a reasonable basis for public consultation as:
· the AIAL share
price has increased despite the flooding and associated disruption at the
airport
· most cost
reductions can still be progressed albeit with some risk of delay
· there remains
available debt headroom and
· rates
affordability for most ratepayers remains unchanged.
30. While the
larger budget changes are likely to play out through the next long-term plan,
Aucklanders’ priorities for next year may have shifted. After discussion
with the Mayor, the following changes are proposed to be included in the
consultation materials for the annual budget:
· Acknowledgement of
the event and a strong commitment to supporting recovery
· Recognition that
there will be some additional costs for 2023/2024
· Recognition that
the implementation of some cost reductions may be delayed
· Removing reference
to changing how we budget for reactive stormwater maintenance to save $2
million each year
· Incorporating a
proposal for consultation to introduce a new $20 million operating budget
provision each year for storm response, noting that the rates increase for
2023/2024 may need to be around 1% higher to pay for this.
· Noting that
capital investment programmes for 2023/2024 will change as some new projects
are delayed with the funding and delivery effort being redirected to asset
renewals
· Signalling that through
the next 10-year budget we will need to consider some significant changes to
asset renewal programmes and our approach to planning and building climate
resilient infrastructure.
Next steps
31. Elected
members will be kept up to date on the costs related to the storm damage and
impacts on our budgets over the coming weeks and months.
32. Draft
consultation materials are being made available to you today, incorporating the
adjustments discussed in this memo.
33. These
materials will be discussed at a Governing Body workshop on Thursday 9
February, ahead of the Governing Body meeting to adopt them on Wednesday 15
December.
34. Final
decisions on the budget will be made by the Governing Body in May/June
following public consultation and consideration of the latest financial
information.
